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August 2, 2013

Commodity-ETF Assets Fell $49B in Q2: Report

Experts says a variety of factors caused investor sell-offs of metals, which the say were 'overdone'

A report issued Friday by ETF Securities says that record outflows tied to a boost in interest rates, decline in gold prices and related factors led to large outflows from commodity-focused exchange-traded products from March to June.

As a result, assets in commodity focused ETPs dropped $49 billion during the second quarter to hit $127 billion, the lowest level since Q2 2010.

On the upside, the report’s authors note, gold ETP outflows–which peaked in April–moderated in May and June. “The moderation may indicate that the worst of the gold ETP selling is now behind us,” they stated.

For investors looking for a bright spot, ETF Securities points to platinum, which had $712 million of inflows in the second quarter due to concerns over growing supplies.

“The outlook for most commodity flows and prices will likely turn on perceptions of whether the recent liquidity squeeze and growth scare in China is temporary or the start of a larger trend,” explained Michael Langerup, Edith Southammakosane and their colleagues. “Gold and silver will likely remain beholden to views on the Fed’s intentions and the direction of real interest rates. On both counts we believe investor reactions have been overdone.”

Gold Hit

Gold ETPs had close to $19 billion of net outflows in Q2, the largest quarterly outflows since the first gold ETP was created in 2003.

Gold ETP assets declined by $48.9 billion during the period.

“More than 60% of the fall in gold ETP AUM was driven by gold prices dropping by over a fifth,” the report stated, as real interest rates rose, the markets adjusted to expectations of a drop in Fed bond buying and the U.S. dollar strengthened.

Other Metals

ETPs focused on platinum had $712 million of net inflows in Q2. Supplied remained tight, and there were rising concerns about future supplies in South Africa, where labor disputes and power shortages have been a concern.

Palladium saw strong inflows in April and May, which reversed in June when China’s growth came into focus

Copper ETPs had $67 million of inflows in May and June tie to fears that accidents at mines in Indonesia and the United States would hurt global supply. Concerns over slowing growth in China contributed to outflows in April of $137 million

Zinc drew $13 million of net inflows during the quarter.

Agriculture, Oil

Agriculture ETPs had net outflows of $108 million in Q2, which reversed most of the Q1 inflows. The outflows appeared to be related to rising supply expectations for grains and soybeans after record planting.

“As we saw last year, severe drought conditions can quickly change these expectations, and flows into these products are likely to be sensitive to weather conditions over the course of the summer,” ETF Securities noted.

Tightening West Texas Intermediate oil-supply conditions led to a slowdown in outflows from oil ETPs to $170 million in Q2 vs. outflows of $848 million Q1. There were signs that U.S. oil inventories peaked early in the most-recent quarter, which provided a tailwind for prices.

Conclusions

Gold prices were the main factor in the Q2 drop in commodity ETP assets, as investors sold into the price declines and exacerbated outflows.

Concerns over possibly austerity moves in China, along with shifts in U.S. Fed policy, dominated investor thinking.

“In our view, both the fall in gold price and investor selling of gold ETPs is overdone,” the ETF Securities experts stated. “We believe the recent sharp rise in real interest rates has been excessive given the macro environment, and any unwind should help support the gold price and gold ETP flows.”

If bumps in China’s growth story turn out to be temporary, for instance, prices for platinum, palladium and copper could improve along with inflows.

“The current soft patch in agricultural ETP demand could turn very quickly if drought conditions we saw last year in the US return,” the report concluded. “Moreover, agriculture has a relatively low correlation with the business cycle, which may attract contrarian investors looking for uncorrelated assets.”